Tax Pooling

You can easily save more than 25% of IRD’s interest cost on your provisional tax. All with the seal of approval of the IRD.

If you don’t pay the correct amount of tax on time the IRD charge you interest. The current rate is 8.89%.

Tax pooling is a service introduced by Inland Revenue in 2003 that allows provisional taxpayers to reduce their exposure to IRD interest costs.

How it works: When we have finished your income tax return, we will inform you whether you owe any further tax to IRD. In many cases, you will also owe IRD interest.

Tax pooling allows you to buy tax credits that other taxpayers do not need. These tax credits have already been paid to IRD, but through the tax pool can be transferred from the seller to you. The cost of buying those credits is substantially less than paying IRD interest.

The table below shows the savings you can make on 2011 underpaid provisional tax if purchased in March 2012.

Underpaid Provisional Tax	Estimated Savings
$10,000	$268
$20,000	$536
$30,000	$803
$50,000	$1,338
$100,000	$2,675

We can quickly arrange a tax purchase on your behalf as we work closely with NZ’s leading tax pooling company, Tax Management NZ. They’ve assisted thousands of NZ companies and individual provisional taxpayers in saving money.

Remuneration of shareholder employees

The Penny and Hooper decision is a landmark tax avoidance case that has implications for small businesses operating through a company or trust. Essentially, the Supreme Court decided in favour of Inland Revenue, concluding that setting artificially low salaries amounted to tax avoidance.

Penny and Hooper were two orthopaedic surgeons, each earning taxable income of between $600k and $850k a year. They restructured their businesses into companies with a family trust owning most of the shares. They provided their services to the companies in return for salaries of $100k - $120k each year. The balance of the company’s income was declared as dividends to the family trust which the surgeons drew from regularly.

Each year tax of between $20k and $30k was saved by having the profits after salaries taxed at the trustee rate rather than at the surgeons’ individual top personal tax rates. The court found these savings a ‘more than merely incidental’ reason for their low salaries.

The IRD has put businesses on alert and is actively reviewing those operating through a company or trust where the income is generated from services provided by an individual, and the individual’s salary is unreasonably low. Although there may be good reasons for setting the salary low in a particular year, e.g. adverse business conditions, or a planned expansion of the business, in some cases the sole reason for the salary level is to take advantage of the lower tax rate that applies to companies.

The IRD is entitled to go back four years into a business’ records, but have publicly confirmed that where a ‘voluntary disclosure’ is made, only the last two income tax returns will be reassessed. A voluntary disclosure might significantly reduce IRD penalties or avoid them entirely.

Whenever we’re discussing your business we’ll look at this for you. In the meantime, if you are concerned and would like to discuss this with us, please do contact us.

End of year checklist!

1. Consider pre-paying certain expenses

Some expenses can be prepaid in March and claimed as a tax deduction in the year to 31 March 2012, regardless of their amount. These include stationery, postage and courier charges, vehicle registration and road user charges, rates, subscriptions for papers or journals, and even audit and accounting fees!
Other expenses have limits on the extent to which they can be claimed if prepaid. These include rent, consumables, insurance premiums, professional or trade subscriptions, travel and accommodation, advertising, periodic charges and other services. The rules surrounding prepayments are quite complex, so if you’re planning this type of expenditure, please contact us.

2. Trading stock

Trading stock (excluding livestock) must be valued at the lower of cost or realisable value. General adjustments for obsolete stock are not acceptable to Inland Revenue. It’s important therefore to perform a physical stock take at year end and actually dispose of any obsolete lines or alternatively write that stock down to its net realisable value.
Clients with an annual turnover of less than $1.3m can value their closing stock at the opening stock value, but only where closing stock can be reliably estimated to be less than $10,000.

3. Loss offsets and subvention payments

2011 loss offset or subvention elections must be filed with IRD on or before 31 March 2012. Subvention payments relating to the 2011 income year must be paid by 31 March this year. The IRD recently changed its practice of requiring an actual physical payment, and now accepts that a subvention payment can also be made by book entries so long as the payment obligation is discharged.

4. Write off any bad debts

To claim a deduction for a bad debt you need to physically write the debt off in your debtors’ ledger prior to the end of your financial year. For most clients that’s 31 March 2012. There should also be evidence that you have taken reasonable steps to recover the debt prior to writing it off.

5. Employee expenses

Any amounts owing to employees at year end (such as holiday pay, bonuses, long service leave, redundancy payments) can be claimed for tax purposes in the current year as long as they are paid within 63 days of balance date.

6. Review last year’s fixed asset register

The book value of assets can be written off for tax purposes if the asset is no longer in use by the business, the business has no intention of using that asset in the future and the cost of disposing that asset is expected to be greater than the proceeds from its sale. Actually, it’s simpler than that. Scan your asset schedule from last year’s accounts and you’ll probably notice assets that no longer exist (the mobile phone that you dropped in the tide at Christmas time), or simply don’t work.

7. Retentions

Retention on building contracts are generally taxable in the year the contractor becomes legally entitled to receive them. This can result in significant deferral of income.
8. Discount reserves

A deduction for a discount reserve, to cover for example prompt payment discounts, is allowable where debtors are entitled to such a discount. In the first year a deduction of the actual discount percentage is allowed and in subsequent years a calculation is made to maintain the discount reserve at that percentage level. If the credit period offered to customers exceeds 93 days, different rules apply.

9. Repairs and maintenance

General adjustments for repairs and maintenance reserves are not allowed as a tax deduction. Instead it may be worthwhile to undertake any necessary repairs and maintenance on key assets prior to the end of the financial year to ensure a full deduction. Deciding whether expenditure on an asset is deductible as repairs or maintenance or should be capitalised is not always cut and dried, so please contact us if you aren’t sure.

10. Imputation credits and dividends

Companies have until 31 March 2012 to distribute imputation dividends that arose based on the old company tax rate of 30%. From 1 April 2012, imputation credits to be distributed are limited to the equivalent of 28%, in line with the new company tax rate effective from that date.
In addition, imputation credit account balances must not be overdrawn as at 31 March each year. If so, they attract penalties.
We realise the subject for imputation credits is complex for many of our clients. Rest assured we will contact you regarding any necessary dividend and taxation planning before 31 March.

11. Income

Be sure to review any credit notes issued to customers following balance date that can be applied to the previous year, i.e. 31 March 2012. In doing so, you will be entitled to effectively reduce your current year’s taxable income.

Book out your bach, avoid a tax headache!

Recent years have seen a surge in popularity in the short-stay rental of holiday homes. The internet has made it easier to list, book and review baches and cribs which are available when owners aren’t in residence.

Inland Revenue have recently issued a paper proposing new rules on mixed-use assets (including holiday homes) where there is a mixture of business and personal use, with revised criteria that should be adhered to when booking out the bach. But until the rules are formally changed, the current policies still apply.

Firstly, it’s vital that your intentions are bona fide. You must market the holiday home in a commercial manner such as setting up and using a website for the property, registering the property with a reputable holiday home website or listing the property for short stay rental with local real estate agencies. These efforts cannot be seen to be ‘token’, you should be accepting offers from suitable renters.

Secondly, your own (plus family and friends’) use of the property must be diarised so you can determine the days in a year that the property was available for renting out.
If the property is owned by an individual or a family trust the expenses relating to the property including the utilities (power, rates, insurance), maintenance and interest on debt will be apportioned according to the number of days in a year the house was available for rent.

There are GST issues too. Short stay accommodation is a taxable supply for GST purposes so if the annual rent you are receiving exceeds $60,000, the owning entity (individual, partnership, company or trust) is required to register for GST and return GST on the outputs (rent) and inputs (expenses and improvements) made and received. This threshold may seem high but some do have more than one holiday home in the same entity! This threshold includes the market value of free or cheap use of the bach by persons associated to the owner.

The value of the property becomes a taxable supply when registration occurs and when the property is sold or the entity de-registered. Both the income tax and GST issues can be quite tricky so we recommend consulting us to make sure all the tax bases are covered correctly.

What gifts are tax deductible?

Let’s look at the tax treatment of saying thanks to customers and staff typically with gifts, wining and dining.
Inland Revenue’s IR268 guide gives the following examples of where entertainment expenses are 50% deductible:

• Taking customers, suppliers and business associates out for dinner or putting on a function for them
• The traditional Christmas party for staff
• Shouting customers, suppliers and staff to an event, e.g. a rugby game or a show
• Taking them on a jaunt in your launch (running/hireage costs and food and alcohol)
• Giving them the use of your bach or time share apartment as a thank you gesture (the occupancy costs)

We’ve been asked ‘why only 50% deductible?’ Apparently it’s because we get some personal enjoyment or benefit from quaffing a wine and tucking into a steak (too right!).

In lieu of a Christmas party you may give your employees restaurant vouchers to use at their discretion. This cost is fully deductible but is subject to fringe benefit tax (FBT), although there is an exemption of $300 per employee per quarter (a maximum exemption can apply). The same treatment applies to staff gifts, again fully deductible but subject to FBT under the ‘other benefits’ category.

As a thank you gesture many firms give their customers gifts during the festive season. The cost of the gifts is fully tax deductible as marketing and promotion expenditure.

Many firms pay their staff a Christmas cash bonus. These payments are classed as ‘extra emoluments’ and are fully deductible but have PAYE deducted at the employee’s marginal tax rate e.g. 33% if earning over $70,000 per annum.

If in doubt about where you stand tax deductibility-wise with your generosity to customers and staff, check with us and we’ll help you get it right.

We're on a road to Twizel...

We have teamed with Mike Toepfer from AWS to delight Twizel with a monthly visit. As we have a bunch of existing clients we thought it would be smart to let the rest of Twizel know that we are available to see them also. With no resident lawyer or accountant we didn't want to leave Twizel out in the cold.

Our first consultation is at no charge, we can bring you a latte and you can have a lawyer and an accountant at your disposal. Cool eh?!

Next visit July 26th....

Our GST Safety Net - We've Got Your Back

With the new budget announcement of the GST rate change we know that the change over period may be a bit hectic for you. We want you to know we have a plan to help you through it so that you don't have issues down the track that will cost you time and money.

This change over will be a little bit tricky but we plan to check your systems and hand hold you through the months of the change over. We are here to help.

We can't express it strongly enough though, if your system is archaic give us a call and we can have Bronnie, our system genius talk you through some options. Its more fun than it sounds, promise.

A bolder budget?

This Thursday May 20th the government will announce the 2010 budget.

All talk alludes to economic growth and incentives for hard working Kiwis to get ahead.

Major changes to the NZ tax system maybe on the cards with some lavish attention being applied to the GST rate, tax rules around rental properties and personal tax rates.

"As the Prime Minister has said, we want to create a tax system that strengthens the economy, rewards effort, reduces tax avoidance and keeps talented New Zealanders at home. We also want to tilt the economy towards exports and investment, and away from consumption and borrowing."

Tune in Thursday to hear what happens.

Shock horror its terminal tax time!

Wanaka and the surrounding area was treated to a spectacular electrical storm this weekend. Booming thunder and serious lightening woke up the town early Monday morning.
Shock horror, this is also your friendly reminder to pay terminal tax April 7th. If you have any questions or would like us help you to set up installments, please give us a call.

The tables have turned....

Heads up, FYI!!!
The 2011 Inland Revenue PAYE tax tables are out. There is a change in the calculations for 'pay as you earn' income tax. You need to start using the new tables from April 1st.
In the past IRD has sent these out but to make sure that you have a copy we have kindly supplied a copy of these in our toolbox.

Who ate all the PIE

Advantage, point, match, game over for some investors as new tax laws come in to play April Fools day of this year. The Taxation Act 2009 introduces changes to align RWT rates on interest with recent changes to personal tax rates and the company tax rates, and alignment of PIE tax rates with personal tax rates.
GoodReturns.co.nz quotes Paul Mersi, PricewaterhouseCoopers financial services partner, saying: "The changes are totally logical and consistent with the new personal tax rates; it's just that they're late, so that means some people in this interim year are advantaged or disadvantaged by the lateness."
The announcement has been made early so banks and other financial institutions can get their ducks in a row. If you are concerned or want to check your situation with Wayne or Scott, drop them a line or phone in to understand your set up today.